Household Wealth and Spending - 4/24/14

American households have collectively experienced a surge in wealth that totals more than $25 trillion since early 2009 due to a combination of rising stock and housing values. According to Michael Feroli, chief U.S. economist at JP Morgan Chase, normally that would translate into an addition $1 trillion in household spending through the so-called wealth effect. But the wealth effect appears to be much smaller today. Between 1952 and 2009, households spent 3.8 cents for every extra $1 earned in wealth. But since the recession ended in 2009, households have spent 1.7 cents for every extra $1 earned in wealth, less than half the 3.8 cent average associated with prior decades.

There are a number of explanations for this, including investor unease. There was a time, for instance, when many homeowners counted on their homes to gain in value each year. One is less likely to count on such a thing today. Stock investors are also acutely aware of the fact that gains may be temporary. Moreover, much of the gain in wealth has been among the already rich, who have less of a propensity to increase spending incrementally.